A Mix of Oil and Environmentalism; Russia's Government Plays the Regulation Card in Its Energy Deals

By ANDREW E. KRAMER

Published: October 6, 2006

For more than a decade, Dmitri V. Lisitsyn waged a lonely, losing battle to protect the local salmon and gray whales from the world's large oil companies, which are turning bucolic Sakhalin Island into an industrial hub for energy in Asia.

Now, Mr. Lisitsyn suddenly has the full support of an unlikely environmental champion: the Russian government.

The authorities, who had never shown any interest in Mr. Lisitsyn's environmental causes in the past, have now taken them up as a means to stall giant projects by the oil companies Royal Dutch Shell and Exxon Mobil here on Sakhalin, a placid island near Siberia that is unfathomably rich with oil and gas. But the unusual tie-up is just the latest move in an intensifying face-off between the big oil companies and the Kremlin, which wants to recover -- but pay very little -- for energy assets it sold to foreigners when oil prices were low.

Unlike Hugo Ch?z of Venezuela or Evo Morales of Bolivia, who recently sent in his army to seize natural gas fields, the Kremlin is using more sophisticated methods -- though the results are no less insidious from the oil companies' point of view.

Just now, Exxon Mobil is clashing with the Kremlin over whether it can send out its first tanker exports of crude oil from the $17 billion Sakhalin 1 project. Exports were supposed to start the first week of October, but at a conference on Sept. 28, Russian officials warned that shipments would be halted for health and safety checks. Exxon Mobil insisted the tanker would set off as planned.

The tanker is to take oil from one of the world's newest energy provinces to Asia; some of the oil will also make its way to California, helping to diversify supply away from the Middle East, a goal of the Bush administration's energy policy.

[By yesterday, the tanker, Viktor Titov, was still moored to the dock at the De-Kastri terminal on the Tatar Strait in the Russian Far East. Late yesterday evening, Exxon Mobil would say only that the terminal was being tested and needed additional Russian government permits, and would not comment on when the tanker would depart.]

An even bigger target lately is Shell and its $20 billion project, Sakhalin 2, which represents the largest foreign investment in Russia and is the world's largest combined oil and natural gas development. Authorities have also singled out BP fields in Siberia and a project of the French oil company Total in northern Russia.

Russia is now using environmental regulation, oil analysts say, to weaken the negotiating positions of the country's largest foreign investors, in the same way it used the tax code to weaken Yukos, once Russia's largest private oil company. Yukos went bankrupt when the government selectively enforced certain tax rules.

Indeed, since Rosneft, a state-run company, took over Yukos's oil production, the Kremlin has raised its control over the country's energy assets, with wide implications for the world oil supply. This summer Russia surpassed Saudi Arabia as the world's largest oil producer.

''The official rhetoric is getting steadily more shrill and does not bode well for the future of foreign oil companies in Russia,'' the director of Goldman Sachs's Moscow office, Rory MacFarquhar, wrote in a note to investors recently. ''We continue to believe that the aim of this campaign is to force the foreign companies to accept Russian state companies as equal or even majority partners in their projects, possibly for no compensation.''

Shell's project is now in limbo because regulators revoked a permit for Sakhalin 2, a move that threatened to idle 17,000 workers. That revocation was suspended for a second environmental review, scheduled to be completed on Oct. 25, when a new showdown is expected.

Regulators this fall are pressuring all five large Western oil investments in Russia in which the government does not have a controlling stake: Sakhalin 2; Sakhalin 1; BP's venture, TNK-BP; Total's Kharyaga field; and the Caspian Pipeline Consortium, which exports Central Asian oil across Russian territory.

Even Nezavisimaya Gazeta in Moscow noted this summer in an article it was ''open season'' on foreign energy investment.

[On Wednesday, Anthony Brenton, Britain's ambassador to Russia, called the actions ''a serious blow to Russia's reputation as a business partner and supplier of energy resources.'']

In a choreographed show of official outrage over the environment unusual for Russia's government, Oleg L. Mitvol, deputy director of the environmental watchdog agency Rosprirodnadzor, recently led journalists, diplomats and conservationists in a tour of Shell's project.

On the tour, Mr. Mitvol pointed angrily at a muddy hillside on Shell's pipeline route. Pointing out upturned trees, he said he suspected pollution was behind the deaths of two fish he found belly-up in a stream, and he described how divers had shown him what he called a ''mutant,'' a starfish with three arms instead of the usual five. At one point, as an aide casually flicked a cigarette butt into the Pacific Ocean, Mr. Mitvol stood on a fishing pier and denounced Shell's intrusion in Aniva Bay.